Booklet 2 - Micro Flashcards
Definition - demand
The quantity of a good or service that people are willing to buy at a given price
Definition - Effective demand
the willingness and ability to buy a good or service
Definition - Diminishing marginal utility
Utility will decline with each subsequent unit
Definition - contraction in demand
- how that effects a graph
an increase in price will cause the quantity demanded to be lower
- moves up the demand curve
Definition - extension in demand
- how that effects a graph
A reduction in price will cause the quantity demanded to be higher
- moves down the demand curve
Definition - supply
the quantity of a good or service that sellers are prepared to sell at a given price in a given time period
Definition - law of supply
as price rises, quantity supplied increases
- as price rises sellers have a greater incentive to sell as they will make a higher return
Definition - contraction of supply
- how that effects a graph
A reduction in price will cause the quantity supplied to be lower
- moves down the supply curve
Definition - extension of supply
- how that effects a graph
An increase in price will cause the quantity supplied to be higher
- moves up the supply curve
Definition - market
where buyers and sellers come to together
Definition - market equilibrium
the point at which the supply and demand curves cross
Definition - market clearing price
the price at which quantity supplied exactly equals quantity demanded
market forces
.
what are the factors affecting demand
- income
- price of other goods
- tastes and preferences
- expectations of the future
- change in population
What would happen to demand if income increased on a demand and supply graph
Shifts demand to the right and the equilibrium price rises
Definition - normal good
a good for when income is higher
Definition - inferior good
a good for when incomes are lower
Definition - substitutes
a good that can used for the same purpose as another
Definition - complementary good
goods that are bought and consumed together
Definition - competitive demand
the relationship between two goods that are substitutes
Definition - joint demand
the relationship between two goods that are complementary
Definition - tastes and preferences
what is fashion forward then more people will want to buy it
what would happen to demand curve if the expectation of the future was for the price to rise
there is more incentive to buy it now as they will get a greater return so demand shifts to the right
Factors that might shift the supply curve
- cost of production
- taxes
- availability of technology
- productivity
- expectations of the future
- government legislation
Definition - derived demand
the demand for one good is made from the demand for another good. E.g. used in production of something else
Definition - composite demand
a good is demanded for two or more uses
Definition - joint supply
an increase in the supply of one good leads to an increase in the supply of another
Definition - consumer surplus
the welfare gained by a consumer who pays less for a good or service than the maximum they would have been prepared to pay
Definition - producer surplus
The welfare gained by a seller who receives more for a good than the minimum they would have been prepared to accept
Definition- price elasticity of demand
A measure of the responsiveness of the quantity demanded of a good or service is to a change in price
Definition - price elasticity of supply
A measure of the responsiveness of quantity supplied to a change in price
What determines PED
- brand loyalty
- necessity vs luxury
- availability of substitutes
- habit and addiction
- expected duration of price change
- proportion of income
Why might supply be price inelastic
- lack of resources
- could be operating at full capacity
- expansion could take time
- could be only short-term
